Hard Money Lending - My first time and I need help!

[Michael Clay]

I'm going to be hard lending money for the first time and I need some pointers. I've inspected the property with the lendee and I'm comfortable lending her 80% of the value. She's buying the property for 125k and I'm lending her 100K.  She hasn't given me an appraisal or inspection. She is going to be flipping the property and expects to repay me  within 6 months.  Here are my main questions:

-Should I be getting an inspection report and/or an appraisal from her?

-What type of contract should I use to write up the terms?

-What type of background info should I be getting from her (if any) ?

-What type of interest/points are standard for this type of deal?

I'm probably leaving out a handful of pertinent questions. Any additionally information would be great. Thanks in advance!

[Jeff S.]

All lenders have their own criteria, which I suppose works for them, @Michael Clay. I'm not sure we would know what to do with a borrower's credit report if it hit us in the head.

There is absolutely nothing in a credit report or background check that tells us a borrower knows how to flip a house, make money, and pay you back. These are business purpose loans, not consumer credit.

You didn't mention your relationship with this individual or their experience. The last thing you want to do is loan to someone you hardly know who has an 800 FICO score and has either never flipped a house or has minimal experience. Do you really want someone learning on your dime?

Several years ago, a few of us detailed our lending processes step-by-step here:

I would like to become a Hard Money Lender. Any resources?

My contribution to this thread is still about 90% accurate for us. You'll read that getting to know the borrower a little, as well as their experience, is paramount in our view. We won't loan to someone we've never met in advance or who doesn't do this full time. To know, like, and trust is an overused real estate cliché, but we've run a successful business around it.

Once you vet your borrower I strongly suggest you not try to re-invent the wheel. After you've spoken to a lending attorney in your state (NOT a real estate attorney who does closings), to get a glimpse of the law, I recommend you contact one of the larger hard money lenders in your area and have them originate the loan for you. It shouldn't be hard to find one if you attend a few local real estate clubs.

An experienced HML will have vetted paperwork and will know how to evaluate the deal, the borrower, and navigate within the law. Compliance can be a huge issue. We personally don't use appraisals because we can do our own comps. Your HML and you might want to though (and state law could require it). We also have one rate structure and never make anything up on the fly or use broad ranges. Rates are always local and no one here can give you the prevailing HML rates in Charlotte unless they are local. Plus, you never want a borrower to guess what you might charge. If they have a deal that fits, they'll call you.

Alternately, some HML's sell their loans and you could get into the business that way. Charlotte is a large city with plenty of business. It's just too easy to stay close to home when you loan money, Michael, so be careful and good luck.

Jeff S. Private Lender in Los Angeles